China’s Fiscal Reforms Need To Help Local Morale, Experts Say

(Bloomberg) -- China needs to rethink the incentives it gives its local governments to support the economy as top leaders map out their biggest reforms for fiscal policy in a decade, according to government-linked economists.

Upcoming reforms are expected to lay the foundation for the “institutional design of the fiscal regime in the coming 20 to 30 years,” said Feng Qiaobin, a deputy director of the macro economic research of the Development Research Center, at a forum held by Renmin University of China on Sunday. “The key is we must consider how to incentivize local governments.”

Feng — who works at a think tank affiliated with the State Council, China’s cabinet — made the remarks roughly a month after Chinese officials announced that they planned to carry out “a new round of fiscal reform,” one outcome of the country’s annual Central Economic Work Conference intended to chart future policy.

Many economists have taken that to mean authorities are preparing for the nation’s most significant budget revamp since 2013, when the ruling Communist Party vowed to “deepen reforms into fiscal and tax institutions.” That foreshadowed a slew of changes over the following decade, including an unprecedented round of tax cuts and the scrapping of a business tax that had previously been a major source of income for local governments.

Feng cited as a major issue for the next big fiscal revamp the relationship between Beijing and the nation’s local authorities. 

Local debt risks and strained finances among regional authorities are pressing issues facing the world’s second-largest economy. Any realignment of policies to address those problems will likely have a profound impact as Beijing looks to pool national resources to work toward breakthroughs in technology and manufacturing — efforts meant to create new growth drivers as the property market has collapsed. 

Economists have also cited a need for China to find new ways to replenish government coffers as the economic slowdown makes it tougher to generate revenue via taxes. Income that authorities have derived from selling land, meanwhile, has slumped due to the ongoing property crisis. 

While it will be necessary for China to ensure that spending needs among local governments are met via financial aid, Feng said, she stressed that even more important is to provide incentive for those officials to act in ways that drive economic growth and boost revenue. 

Read More: China’s Budget Shift Risks Local Officials ‘Lying Flat’

Inter-governmental relations have been the “main focus” of fiscal reform through the years, said Lv Bingyang, executive director of the Institute of Public Finance and Taxation at Remin University, at the same event Sunday.

A core part of any fiscal recalibration should involve changes in tax revenue sharing between the central, provincial and lower-level governments, he said. That would help tackle local financial stresses and motivate officials. 

In the past, reforms have intended to reduce the government’s role in driving growth in favor of allowing the market to play a greater role in doing so. But China’s “specific” way of development may delay that transition, according to Feng.

“Local governments may still need to play their due role in stabilizing economic growth for a rather long period of time,” she said. “Therefore, their lack of vitality clearly should be resolved in fiscal reform.”

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